Fort Worth, the only major city in the state not to pass an ordinance restricting the operations of payday lenders, is taking a new look at the issue.
Two weeks ago, City Manager Tom Higgins released a report on payday lenders for council members, noting that most of the 15 cities in Texas that have passed new regulations have been sued by a trade group representing the lenders. Responding to a council request, the report said city staff members would monitor the lawsuits against San Antonio and Dallas to determine if it’s practical to adopt a payday loan ordinance here.
In December, Houston issued new rules to curb firms making the high-interest, short-term loans whose rates can climb to over 400 percent. It followed similar moves by Dallas, Austin, San Antonio, Denton and El Paso after the state Legislature failed to pass curbs in 2013 on what critics describe as predatory lending that can trap borrowers in a cycle of debt.
“It’s a shameful reality that we have not adopted the [league] recommended ordinance,” said City Councilman Joel Burns of District 9, who is leaving office this summer to attend graduate school. “I would love for us to pass a predatory lending ordinance before I depart in July. The question is, can I get five of the nine council members to go in for it? I don’t have an answer to that.”
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The city manager’s report, issued on May 6, advised against taking immediate action and recommended monitoring the lawsuits against the ordinances, modeled on a version crafted by the Texas Municipal League. Fort Worth is the home base for one of the country’s biggest payday loan companies, Cash America, and large competitors are based nearby in Arlington and Irving, Cash First and ACE Cash Express.
So far, Burns has one known supporter on the council, Sal Espino of District 2.
“When someone pays 400 percent interest, that’s obviously unfair,” Espino said. “It should be illegal.” Asked why the council hasn’t acted so far, he said, “I’m concerned, but I suppose we’re proceeding with an abundance of caution.”
Kelly Allen Gray, whose district includes the East Lancaster area that has a cluster of payday and auto title lenders, said she’d back an ordinance if the city could determine who would enforce it and whether the budget could handle the new monitoring costs.
That said, Gray attacked the steep loans. “Oh my God, the interest rates are astronomical. And if you can’t pay the loans back, there’s a domino effect. How do we help people avoid this heartache?”
Fort Worth Mayor Betsy Price also criticized the sky-high interest rates but similarly urged caution on interfering with market-driven activity. She instead recommended finding a way to better educate people about managing their finances.
“We have to be careful about having a knee-jerk reaction,” the mayor warned. “For one thing, the cities [that passed ordinances] are involved in costly litigation.”
The league’s model ordinance doesn’t set a cap on interest rates but limits the small, uncollateralized loans to 20 percent of a borrower’s gross monthly income. Auto title loans cannot exceed 3 percent of a consumer’s gross annual income or 70 percent of the vehicle’s retail value. Each refinancing or renewal must be used to repay at least 25 percent of the principal, and each lender must be registered with the city.
Industry scales back
Because of the slew of ordinances, Cash America last year announced the closure of 28 stand-alone payday loan stores in Texas. The closings extended to cities like Fort Worth that have not restricted the high-interest loans.
“Those [free-standing] shops just very quickly are negatively impacted by the city ordinances and have been for some time,” Cash America CEO Daniel R. Feehan told analysts in a conference call last October. Feehan said he had hoped to “get some relief” from the 2012 Texas Legislature with a law that would override the municipal ordinances. “That didn't happen. .... [And] given the impact of those ordinances, shutting [them] down is really a smart thing for us to do.”
Cash America spokeswoman Yolanda Walker said that the company continues to extend payday loans in Fort Worth at its pawn shops.
Should the city council decide to proceed sooner rather than later, Higgins recommended using the league’s example ordinance, but not enforce it until the legal action around the state is over.
An industry group, the Consumer Alliance Service of Texas, is behind most of the suits challenging the ordinances. In Austin, it asserted that a city cannot restrict lending in ways that are regulated by the state, said alliance spokesperson Rob Norcross. Austin also violated the open meeting laws in connection with the ordinance, he alleged.
A judge dismissed the case against Dallas, which argued that it couldn’t be sued because it hasn’t enforced the ordinance. The alliance has appealed and a ruling is expected by midsummer, Norcross said.
Attorney General Greg Abbott has issued no opinion on the legality of the city ordinances.
Higgins noted that Irving, Watauga, Richardson, Garland, Mesquite and several other cities have tried to clamp down on payday lenders through zoning — requiring special use permits for new locations. He recommended against such a step, noting that unlike sexually oriented businesses, the loan offices present no notable adverse land use effect. And current stores would have to be grandfathered.
But many of the lenders themselves don’t have a problem with zoning restrictions.
“The industry is not opposed to meaningful, reasonable legislation,” Norcross said. “We’ve not objected to the zoning ordinances at all.”
The cities’ various moves have had an impact. By the end of 2012, Norcross said, 107 payday loan shops closed in Dallas, which meant 205 workers were laid off and 5.9 million in annual wages and benefits lost.
Harry Harwell scoffs at the idea that a city ordinance will stop Fort Worth residents from getting payday loans.
“There are 50 little cities nearby,” said Harwell, a partner in Cash Now on East Lancaster. “They’ll just drive to another city.”
Fort Worth’s mayor echoed that prediction.
“Even if we took action,” Price said, “they’d move over to neighboring cities. That’s what Houston has found.”
And then there are always payday loans offered on the Internet, Harwell said.
Many of the major lenders have websites. Cash America has them in four countries — the U.S., Canada, Australia and the United Kingdom — with names like cashnetusa.com, dollarsdirect.com and quickquid.com.
An 18-year veteran of the industry, Harwell said his Cash Now operation, unlike nearby competitors, refuses to roll over short-term loans. Such refinancing, a common and legal practice in Texas, has come under fire by opponents who say it keeps borrowers from paying down principal. But clients could easily get a signature loan from any of the numerous other firms on East Lancaster to pay off what they borrowed from Cash Now, conceded Harwell, 65, whose company has shrunk from six stores to two because of competition.
Harwell and others in the industry say that they are providing a valuable loan product and are being unfairly singled out. They note that many bank fees, such as a $30 charge on a $10 overdraft, would be extremely high if calculated as an annual percentage rate of interest, which banks are not obliged by law to provide.
Cash Now charges a flat $25 for each $100 borrowed, which he says is a bargain compared with a bank’s typical bounced check charge. And while the loans carry a high interest rate, the default rates can be high too. Harwell said he loses money on about 16 percent of his loans, while most of his larger rivals lose 20 percent or more.
Among misconceptions about the payday loan industry is that all customers are from poor neighborhoods. Noting that competing lenders thrive in middle-class Hurst and upscale Colleyville, Harwell said the common denominator among borrowers is bad credit. Banks don’t hand out signature loans to high-risk borrowers, he said. And many of his clients have never joined a credit union.
“Our biggest customers are schoolteachers, and our best-paying ones too,” said Harwell. “And when I did auto title loans, I had an attorney drive over with his BMW. He told me, ‘If you take my car, leave the tennis rackets.’ ”